Investment Strategy: Strategic Themes and Tactical Positioning

INSTITUTIONAL ASSET MANAGEMENT SYMPOSIUM Investment Strategy: Strategic Themes and Tactical Positioning Northern Trust Investment Strategy northerntrust.com Northern Trust 21 1

CMA: A REVIEW OF THE PROCESS Firm-wide Participation; Firm-wide Implementation 2+ investment professionals participating in a combined 3+ hours of working sessions Collaboration across business units and around the globe; including top-down strategists, bottom-up analysts and clientfacing professionals Foundation for asset allocation processes throughout Northern Trust Forward Looking; Historically Aware Analysis of historical relationships both between asset classes and the economic/ financial market factors that drive returns Acknowledgement that historical relationships can change and identification of where these changes may occur Detailed assumptions in our annuallyreleased Five-Year Outlook Whitepaper northerntrust.com Northern Trust 21 2

Cash U.S. Invest. Grade U.S. TIPS Global High Yield Emerging Markets Developed Markets U.S. Europe ex-u.k. U.K. Japan Canada Australia Emerging Markets Natural Resources Global Real Estate Global Listed Infrastructure Private Equity Hedge Funds CMA: A REVIEW OF THE RESULTS Global equity returns are expected to make slow progress in choppy market waters while global interest rates remain anchored at low levels over the next five years. SLOW GROWTH ANGST STUCK-FLATION COSTS OF ULTRA-LOW RATES POPULIST ROULETTE TECHNOLOGICAL TURBULENCE MARKET CYCLES IN A CYCLE-LESS ECONOMY FIVE YEAR ASSET CLASS TOTAL RETURN FORECASTS - % 5.3 5.5 5.9 5.4 5.3 5. 4.8. 8. 7.3.9.3 5. 7.4 1 8.5 3. 2.5 3.4 4 2 Fixed Income Equities Real Assets Alternatives Sources: Northern Trust Capital Market Assumptions Working Group, Investment Policy Committee. Five year forecasts developed annually; most recent forecasts released 7/18/21. northerntrust.com Northern Trust 21 3

Compound annual growth rate (%) Growth (indexed to 1) SLOW GROWTH ANGST The slow growth environment will continue as lackluster demand shows few signs of abating. Concern over future growth will, in and of itself, impede growth further as consumers spend less and companies are hesitant to invest. CURRENT EXPANSION VS. HISTORY Expansion 3. PAST FOUR U.S. EXPANSIONS 1982 148 198-27 3. 1991 21 14 2.4 Current Current* 132 1.8 124 1.2 11. 18 United States United Kingdom Europe Japan. 5 1 15 2 25 3 35 4 45 Length (quarters) 1 Economic growth during the current recovery has lagged historical growth from 198-27. The current U.S. expansion is four years shy of being the longest expansion on record (post-world War II), but cumulative output has lagged significantly. Sources: Northern Trust, International Monetary Fund, Bloomberg. *Current expansion continued at current growth rate for five years. northerntrust.com Northern Trust 21 4

Inflation rate (%) STUCK-FLATION The combination of supply/demand dynamics (low demand, enough supply) and low future inflation expectations will make it difficult for central bankers to dislodge stuck inflation over the five year horizon. 1-YEAR INFLATION EXPECTATIONS OF SELECT COUNTRIES United Kingdom United States Europe Japan 4.5 4. 28 29 21 211 212 213 214 215 21 Inflation expectations across most developed markets have persisted below the 2% most central banks target. Inflation expectations have been trending lower lately a consequence of low expected global demand. 3.5 3. 2.5 2. 1.5 1..5. Sources: Northern Trust, Bloomberg. Note: Europe data (proxied by Germany) starts in 29; Japan data starts in 213. northerntrust.com Northern Trust 21 5

5-year annualized change (%) 5-year annualized change (%) COSTS OF ULTRA-LOW RATES Recent cost/benefit analyses of ultra-accommodative interest rates are inconclusive as costs rise and benefits are less apparent. Central bankers would like to exit, but the less risky (more likely) approach is more of the same. TOTAL U.S. CREDIT 12 U.S. M3 MONEY SUPPLY 12 1 1 8 8 4 4 2 2 1992 199 2 24 28 212 21 1992 199 2 24 28 212 21 Quantitative easing is failing to fully make it into the real economy; negative rates may be hurting banks. U.S. credit and money supply growth data is struggling to reach the levels of previous expansions. Sources: Northern Trust, Federal Reserve, Encima Global. northerntrust.com Northern Trust 21

Yield (%) FIXED INCOME: INTEREST RATE EXPECTATIONS We remain lower for longer. As market expectations came down in the wake of Brexit, our expectations have been pushed down further. UNITED STATES 3.5 UNITED KINGDOM 3.5 GERMANY 3.5 JAPAN 3.5 3. 3. 3. 3. 2.5 2.5 2.5 2.5 2. 2. 2. 2. 1.5 1.5 1.5 1.5 1. 1. 1. 1..5.5.5.5.... 3-month -.5 -.5 -.5 1-year 3-month 1-year 3-month 1-year 3-month Market - /3/215 Market - /3/21 215 NT CMA 21 NT CMA 1-year -.5 Slow growth and lack of inflationary pressures will keep interest rates low over the five-year horizon. The markets have priced in the economic challenges, but do not yet fully appreciate the effect of low rates globally. Sources: Northern Trust, Bloomberg. NT CMA = Northern Trust Capital Market Assumption forecasts. northerntrust.com Northern Trust 21 7

Subsequent 5-year return, annualized (%) 5-year return, annualized (%) EQUITIES: GEOGRAPHY-BASED OUTLOOK Developed market equities will face return constraints from slower growth and higher valuations; emerging market equities may benefit from a cyclical rebound. DEV. MARKET VALUATIONS VS. RETURNS 5 /3/21 level 4 EMERGING VS. DEVELOPED MARKETS 4 3 3 2 2 1 1-1 -2 1 2 3 Cash flow yield (%) Developed market valuations are stretched, but will be supported by continued easy money policy. -1 Emerging vs developed markets Emerging markets 1993 199 1999 22 25 28 211 214 Emerging markets haven t underperformed developed markets by this much since the Asian financial crisis of the late-199s. -2-3 Sources: Northern Trust, Bloomberg, MSCI. northerntrust.com Northern Trust 21 8

Actual Actual Actual REAL ASSETS Natural resource returns will face global demand headwinds but will benefit from the supply response underway. Global real estate and listed infrastructure will both benefit from lower interest rates, but global demand may affect each in different ways. NATURAL RESOURCES R² =.82 2 GLOBAL REAL ESTATE R² =.83 28 GLOBAL LISTED INFRA. R² =.88 2 1 14 1-1 -14-1 -2-28 -2-3 -3-2 -1 1 2 Predicted Our factor-based models explain over 8% of return variability for all three of our real asset asset classes. -42-4 -2 2 Predicted -3-2 -1 1 2 Predicted We overlay the returns forecasted by our historically-based models with our forward looking views. Sources: Northern Trust, Bloomberg. northerntrust.com Northern Trust 21 9

Premium (%) Correlation ALTERNATIVES While varying by strategy, average manager return forecasts are hurt by lower expectations for alpha magnifying the importance of manager selection. Hedge funds can act as powerful diversifiers for the overall portfolio. FACTOR RETURN PREMIUMS 7.4 8 FACTOR RETURN CORRELATIONS Term Market.5.28.29.25 4. 4.3 4.3..8. 2.2 1.7 2 -.2 -.25 -.37 Term Market Size Value Momentum Term vs. Market Size vs. Value vs. Momentum vs. -.5 Hedge funds can access long-short factors, complimenting the portfolio s traditional term and market exposures. Long-short factors have historically provided material return premiums as well as low correlations to term and market. Sources: Northern Trust, Bloomberg, Ibbotson. Factor return premiums are long-term averages, not CMA forecasts. northerntrust.com Northern Trust 21 1

5-YEAR OUTLOOK: DECLINING RETURN EXPECTATIONS Asset Class 21 Strategic Asset Allocation 5-Year Return Expectation: 21 Outlook 5-Year Return Expectation: 215 Outlook Cash 2.5 1.5 Fixed Income 35 U.S. Investment Grade 28 3. 3. U.S. TIPS 4 2.5 2.5 U.S. High Yield 3 5.3 5. Equities 22 Developed Markets 19 5.4.1 Emerging Markets 3 7.3 7.8 Real Assets Global Natural Resources 3.9 7. Global Listed Infrastructure 1.5 5..2 Global Real Estate 1.5.3.9 Alternatives 35 Hedge Funds 2 3.4 4.4 Private Equity 15 7.4 8. Total Portfolio 1 4.5 5. Source: Northern Trust. Strategic growth & income perpetual capital model. All figures in percentage terms. northerntrust.com Northern Trust 21 11

Total Return (%) HOW DID WE DO? 211 CMA REVISITED EXPECTED 5-YEAR RETURN VS ACTUAL 5 YEAR RETURN 8 5. Expected Actual 14 7..7 7 5 3.3 3.8 4.5 4. 3.5 3. 9.4 8. 12. 9. 1.7 12 1 8 4 3 2.5 2. 7.5 7. 5.5 2 1.5 1. 4. 4 1.5 2.4 2 /4 Fixed Income. Equities U.S. Europe Japan EM Source: Northern Trust. Index proxies: /4 (% MSCI ACWI/4% Barcap U.S. Agg), Fixed income (Barcap U.S. Agg), Equities (MSCI All Country World), U.S. (MSCI U.S.), Europe (MSCI Europe ex U.K.), Japan (MSCI Japan), EM (MSCI Emerging Markets). northerntrust.com Northern Trust 21 12

Alternatives Real Assets Risk Assets Equities Risk Control Fixed Income TACTICAL ASSET ALLOCATION PULLING IN BETS ASSET CLASS STRATEGIC WEIGHT TACTICAL POSITIONING Cash 2-2 U.S. Investment Grade 28-8 U.S. TIPS 4 U.S. High Yield 3 5 U.S. Equity 11 7 Dev ex-u.s. Equity 8-2 EM Equity 3 Natural Resources 3 Global RE/Global Listed Infra. 3 Hedge Funds 2 Private Equity 15 Note: Due to illiquid nature of Alternative asset classes, Northern Trust does not make tactical recommendations. -12-8 -4 4 8 12 Percentage points Source: Northern Trust. Allocations above reflect Northern's Perpetual Capital Model (growth & income objective). Tactical recommendations (in the form of over/under/equal weights) are displayed in the bar chart. Allocations as of 9/9/21. northerntrust.com Northern Trust 21 13

Total return (%) RELIANT ON JUST THE FED? S&P 5 CUMULATIVE RETURN SINCE 27 9 75 45 3 15 S&P 5 S&P 5 ( FOMC decision days) S&P 5 ( FOMC decision days+1) -15-3 -45 28 29 21 211 212 213 214 215 21 - Source: Northern Trust, Bloomberg. Total Cumulative return measured from 12/31/27. northerntrust.com Northern Trust 21 14

Days between rate hikes IT S BEEN A LONG TIME NUMBER OF DAYS BETWEET FED RATE HIKES 3 Days between rate hikes 25 2 15 1 5 Source: Northern Trust, Bloomberg. Data through 9/7/21 northerntrust.com Northern Trust 21 15

Return (%) WILL BOTH STOCKS AND BONDS LOSE MONEY? 7 EQUITIES & FIXED INCOME - ONE YEAR ROLLING RETURNS 45 5 4 3 2 3 15-15 -3 1 Shaded areas indicate instances of "Double Trouble" Equities Fixed Income 1945 1955 195 1975 1985 1995 25 215-45 - Source: Northern Trust, Ibbotson. Index proxies: Ibbotson Associates Stocks, Bonds, Bills and Inflation (IA SBBI) U.S. Large Stocks Total Return for equities and IA SBBI U.S. Intermediate Government Total Return for fixed income. northerntrust.com Northern Trust 21 1

A FOCUS ON BOTH RETURN AND RISK GROWTH OF $1K - USD Tactical portfolio (TAA) Strategic portfolio (SAA) /4 portfolio (/4) 28 29 21 211 212 213 214 215 21 18 1 14 12 1 8 9 8 7 5 4 3 2 1 TRAILING PERFORMANCE - % 3-Month YTD 1-Year 3-Year 5-Year ITD* TAA 3.9 8.3 8.4..9 5.2 SAA 3.7 8. 7.9 5.5 5.9 4.2 /4 3.4.3 7.3.1.5 3.8 3 24 18 12 - -12-18 -24-3 CALENDAR YEAR PERFORMANCE - % 28 29 21 211 212 213 214 215 TAA -2.3 23. 11. 1. 13.3 11.1 4.9-1.4 SAA -24.3 24.3 12.3. 12.4 9.1 4.5-2.7 /4-25.9 23. 1.7-1.2 11.4 12.3 5. -.8 14 12 1 8 4 2 TRAILING VOLATILITY - % 1-Year 3-Year 5-Year ITD* TAA 8.9 7.3 8.2 1.2 SAA 8.8 7. 7.8 11. /4 8.9 7.3 8.2 11.7 Source: Northern Trust, Bloomberg. Performance data through 8/31/21. Volatility data through 8/2/21. *Inception-to-date (12/31/27). SAA and TAA are model portfolios based on Investment Policy Committee asset allocation decisions and asset class index proxies, w hich cannot be directly invested in and may change over time; return figures exclude any potential transaction costs or expenses. The /4 portfolio comprises the MSCI ACWI total return and BarCap U.S. Aggregate indices, respectively. Trailing 3Yr, 5Yr and since inception returns annualized. All volatility figures are annualized and use w eekly data. northerntrust.com Northern Trust 21 17

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